Consumer credit growth accelerates

British households continued to rack up debt in May to fuel their spending, according to data from the Bank of England that highlights recent concerns about the risks to lenders over the soaring growth in consumer credit.

Unsecured net consumer credit rose by £1.7 billion over the month, the highest amount since last November and above the six month-average of £1.5 billion. This was considerably above economists’ expectations of a slowdown in growth to £1.4 billion.

Economists said the figures may mean consumers are using debt to combat the new squeeze on household budgets as the rate of inflation speeds up and real wages begin to fall.

“This suggests that households remain confident enough to increase borrowing to help smooth consumption, in the face of the squeeze on their real incomes,” Ruth Gregory, an economist at Capital Economics, said.

Growth in credit card borrowing did slow to £419 million, from £558 million the previous month, mirroring similar unofficial figures from the British Bankers’ Association this week, but growth in other loans and advances, which include personal loans and car finance, rose faster, from £924 million in April to £1.3 billion in May.

The figures come just days after the Bank’s financial policy committee expressed concerns that lenders were becoming too complacent about the rapid growth of borrowing. Consumer credit growth rose at an annual pace of 10.3 per cent in May, a level not seen in more than a decade and the 13th month of double-digit growth.

The committee believes that banks are becoming too accustomed to the current “relatively benign” conditions in the economy of low unemployment and few consumer credit defaults, and are allowing their normal margins for any sudden large spike in defaults to be squeezed. In order to address this, the financial policy committee has ordered banks to increase their capital buffers used to protect against the risk of bad loans by 0.5 per cent — the equivalent of £5.7 billion — and plans to increase the buffer by a further 0.5 percentage points to 1 per cent in November, equating to a total of £11.4 billion.

The committee also said that it would bring forward its analysis of how the banking sector would cope with sudden big losses in the consumer credit sector from November to September, while next month the Prudential Regulation Authority and Financial Conduct Authority will outline their expectations for how lenders should treat indebted customers.

The continued sharp growth in consumer credit in the face of rising inflation may lead the Bank of England to also consider raising interest rates soon, according to Howard Archer, chief economic adviser to the EY Item Club.

“It may be that the heightened squeeze on consumer purchasing power is increasing the need for some consumers to borrow. The Bank of England will be far from happy with the May consumer credit data, and it could bolster the case for a near-term interest rate hike to try to curb consumers’ readiness to borrow,” Dr Archer said.

The Bank of England’s data also revealed that more mortgages were approved by lenders in May than economists had been expecting. Some 65,202 loans for house purchases were approved in the month, which was lower than the six-month average of 66,990 but 0.2 per cent higher than April’s figure. However, compared with a year ago, approvals were down by 1.9 per cent and were still at their second lowest level since last September. The number of households remortgaging — predominantly to lock-in the ultra-low mortgage rates that are available at present — rose to 42,955 in May, from 40,437 in April.

Britain’s mortgage market makes up 70 per cent of banks’ total stock of lending to real-economy borrowers, compared to less than 10 per cent for consumer credit. However, regulators are more concerned about consumer credit because in the face of a sudden economic shock, borrowers are much more likely to default on consumer credit loans than their mortgages.